HSAs: An Awesome Way to Save for Retirement
In case you missed it, head over to How to Choose Health Insurance for info on deciding between PPO Plans and HDHP health insurance that your employer provides.
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If I’m on an HDHP health insurance, should I open a Health Savings Account?
Yes! You might have to send in proof of residency and an ID to formally open your HSA like I did, but once it’s open, you can start contributing pre-tax money via automatic payroll deductions and possibly even invest the funds in the stock market (capability to invest funds is subject to your HSA provider; Payflex allowed members to do this beginning Jan 1, 2020).
What’s so great about a Health Savings account?
Since money that goes into your HSA is auto-deducted from your paycheck BEFORE taxes, your amount of taxable income is reduced, so you save by paying less taxes per paycheck. Money from your HSA can be used to reimburse yourself for any medical expenses you have throughout the year (qualifying medical expenses here).
Additionally, some HSA providers allow you to invest HSA funds in the stock market. For example, PayFlex is my HSA provider and they allow members to invest any balance above $1,000 in a limited set of mutual fund options on their site. Since I maxed out my HSA in 2018 ($3450) and 2019 ($3500), I had about $7000 in my account at the start of 2020, so I got to buy index funds with $6000. I also have the convenient option of setting recurring investments (either any balance over $1000 or a set amount, like $100/month) so I can set it and forget until I’m olddddd. My plan is to pay for medical expenses out of pocket while I can afford it (e.g. $1000 for wisdom teeth extraction, I dunno), hold onto the receipt/bill, let my HSA contributions grow, and reimburse myself for my dental treatment years later, tax-free. HSA funds are triple tax-advantaged: pre-tax money going in + tax-free growth + tax-free withdrawal if for medical expenses! More info about investing your HSA funds over at The Mad FIentist.
Do my HSA funds roll over from year to year?
Yup. Unlike a Flexible Spending Account (FSA) that comes with a PPO plan, where you only get to rollover $500 of unused funds from year to year, your HSA has no such rule! I started my full-time job in Fall 2018 and have contributed the yearly max amount to my HSA (plus whatever my employer chips in for free) since 2018, so I’ve got about $7,000 in there.
What happens to my HSA if I leave my employer and/or switch off my HDHP to a different health insurance plan?
Good news—while you may no longer be eligible to contribute pre-tax money to your HSA, you don’t have to shut down your account. You can continue reimbursing yourself for medical expenses and/or let the remaining grow if you’ve invested it through your HSA provider.